Uneven corporate liquidity split creates alternative solutions
Banks are stepping up their offerings as the divide grows between corporates with plenty of liquidity and those struggling.
The widening divide between the haves and have-nots of liquidity has created a burgeoning market for products and services to be grown or developed by banks.
This split in liquidity levels is partly down to the way different industries have developed in recent years off the back of falling commodity prices and low interest rates.
“The matter of excess liquidity or scarcity broadly comes down to the manner of the business," says Jennifer Doherty, global head of commercialization, liquidity and investment products at HSBC. "Tech companies, for example, generally have higher cash levels, carrying few overheads. For retailers it is likely to be a different position.” Stephen Baseby, associate policy and technical director at the Association of Corporate Treasurers (ACT), says: “Seeing high cash levels is not unusual, but what is being highlighted is the increasing difficulty of finding somewhere to put it.”
Even tools that have been recently developed are no longer fit for purpose. Notional pooling had been an attractive option for dealing with excess liquidity, but constraints imposed by Basel III pushed up costs, and left it unattractive to all but the most highly rated companies.
HSBC's Doherty explains: “Clients who have traditionally used notional pooling want to know what the alternatives may be, considering the regulatory landscape. Cash concentration is a viable and sustainable alternative. However, consideration clearly needs to be given to the creation of intercompany loans.”
In response to this difficulty, HSBC has launched the Liquidity Investment Solutions (LIS), executed by HSBC Global Asset Management Group, BlackRock, Goldman Sachs Asset Management and/or JPMorgan Asset Management.
Under LIS, treasurers can automatically invest their cash either daily, weekly or monthly, according to their requirements. HSBC states it provides a "controlled environment" for the investment process.
Hugo Parry-Wingfield, senior liquidity product specialist, EMEA, HSBC Global Asset Management, says looking at a number of solutions has its appeal to corporates, adding: “There is a recognition in the value of, and the challenges in managing, excess liquidity, and the benefits that can be obtained through diversification.”
Doherty adds: “There are implications for treasury. They want to be moving their cash to get the maximum impact. If the process can be automated then why not do it? There is the element of flexibility, and it can be bespoke to individual clients. They can both invest and divest automatically.”
HSBC's Parry-Wingfield says the ability for companies to set their own limits on LIS is opening up opportunities to find greater returns on liquidity, adding: “Some clients that normally step in late in their currency day to make investment decisions can now set up an automated process with well-defined and managed rules.”
ACT's Baseby says these types of solution are being created to address a need, while also ensuring that the funds themselves are still flowing through bank channels.
“What is being recognized is that how the banks are being regulated is making them less willing to be the lender, while there is more money becoming available in the venture capital markets originating from pension and insurance funds,” he says.
This shift is creating savvier corporate participants: treasurers are asking more questions about what is being offered, and by whom.
Baseby says: “There have been problems over the years with alternative lenders and investors, and treasurers are asking more about what is going on.”
On the other side of the liquidity spectrum, companies looking for funding are tapping into services that have proved successful away from their home market.
Although not a new solution, Germany’s Schuldschein market has been growing in momentum. Scope Ratings’ market review from July showed there were seven transactions of more than €500 million in the first half of the year, and the full range ran from €11 million to €1.6 billion.
Sebastian Zank, director corporates for Scope Ratings, explains the appeal: “The Schuldschein works as a bilateral loan – often with different tenors – between an issuer and a group of institutional investors.
"Usually an accompanying investment bank underwrites the loan and sells shares to interested investors. Unlike a public bond, the Schuldschein loan can be issued with lean documentation of 20 to 30 pages, and within a comparatively short time-frame, of three months or less.”
Although Schuldschein are still primarily focused on the German market, there is a growing appetite for this type of private placement.
Baseby says: “There is recognition the borrowers are having to diversify. The impact of regulations like Mifid II is affecting the traditional lender’s market and partially as a result we’re hearing more on the private-placements side.”
Corporates outside Germany have been using the solution, and Scope Ratings' Zank points to Austrian, Swiss and French companies in particular. This share of non-German companies is on the increase, representing 40% so far this year, compared with 30% in the previous year.
Although there have been efforts to increase the use of private placements across Europe, notably in France, Spain and Italy, the German market remains the largest. Zank adds that while the Capital Markets Union has suggested there could be standardization across the European markets, differences in the models will make that difficult to implement.
Baseby says the knock-on effect of Schuldschein is what helps make it so appealing, adding: "The German model is what we really should be doing. It is more useful to be helping smaller companies to create jobs than just putting funds with FTSE 100 companies."
With companies looking to enter these uncharted waters, the responsibility of ensuring they are engaging in safe practice falls to the advisory firm.
Parry-Wingfield says: “As professional investment managers, and as fiduciaries, we have responsibilities to the investors in our funds, which includes the appropriateness of the product in the first place and all the way through to how we manage the cash on an ongoing basis.”